Perot's Budget Cuts: How He'd Do It

Unless we take action now," wrote Ross Perot in the preface to his deficit reduction plan, "our nation may confront a situation similar to the Great Depression -- and maybe even worse."

Relatively few mainstream economists buy Mr. Perot's jeremiad at face value. And fewer still believe that the Perot plan, suddenly in the spotlight again now that he seems poised to re-enter the Presidential race, is more than the roughest of drafts for what amounts to a sea change in budget priorities in the midst of a recession. Nowhere does Mr. Perot tackle the sticky question of how many jobs or how much output should be sacrificed in order to put the plan into effect if the economy has not yet fully recovered. Nor does he acknowledge that the plan asks relatively little sacrifice of those who benefited most from the great tax cuts of the 1980's.

But after years of frustration with Washington's inability to cope with deficit spending -- and months of watching the Presidential candidates duck the deficit issue -- economists are not about to rain on Mr. Perot's parade. "There's more to like than not to like," said George Perry of the Brookings Institution.

How to balance the budget? "Reduce spending and generate revenues," Mr. Perot writes. "It's that simple." And at least in the context of agonizing deliberations that preceded the more modest cuts imposed by Congress and the White House in 1990, the Perot plan does seem simple.

To generate revenue, Mr. Perot offers a laundry list of changes, everything from raising the top tax bracket to 33 percent from 31, to reducing deductions for business entertainment and mortgage payments on very expensive houses, to tightening the tax rules for multinational corporations.

But the big-ticket items are a 50-cent-a-gallon tax on gasoline (phased in over five years) and the elimination of the deduction for employer-paid health insurance that exceeds a rock-bottom outlay of $4,000 a year. Even accounting for offsetting tax cuts to encourage investment and training, the tax package would raise $85 billion in 1998.

Every broad category of spending in the budget would take a hit. The defense build-down would be accelerated, with annual savings reaching $17 billion more than could be expected from President Bush's proposed defense outlays. Across-the-board cuts of 10 percent in all discretionary budget items would save $23 billion more. But the most important economies would come from so-called entitlement spending -- the open-ended commitments to provide benefits that generated most of the spending growth in the 1980's.

Agricultural subsidies and tax-favored Social Security checks for affluent retirees are prominently featured. Most of the money, though, would come from tough cost containment of health-care outlays.

Over all, savings on the spending side of the budget would exceed $115 billion annually. Combine that with the revenue gains of $85 billion, season with a projected $64 billion savings on interest payments on the Federal debt as interest rates fall and the deficit shrinks and you have a recipe for balancing the budget in 1998. Some Educated Guesses

Some of the components of the total savings are, at best, educated guesses of what could be achieved. Some $51 billion, for example, comes from unspecified measures to contain the growth of Federal outlays for Medicare and Medicaid. An additional $10 billion comes from unspecified cuts in discretionary spending on programs that are "unnecessary or outdated." And the savings on debt payments depend on projected cuts in interest rates over which neither Congress nor the White House exercises control.

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But budget analysts agree that most of the projected savings are reasonable. Indeed, Robert Reischauer, the director of the Congressional Budget Office, notes that most of the estimates are lifted directly from his agency's annual compilation of spending and deficit reduction options. The real question, then, is not whether the plan is a serious one, but whether deficit reduction with these priorities, managed on this scale and at this speed, would be worth the sacrifice.

The immediate issue is timing. Mr. Perot would "begin his forced march to a balanced budget in 1994," Mr. Reischauer pointed out -- just a year from now. And by the reckoning of most computer models, a 1994 deficit reduction of $50 billion as called for in the Perot plan would reduce the nation's output by about 1 percent.

Some -- perhaps all -- of the economic contraction could be offset by an easing of monetary policy by the Federal Reserve. Moreover, the adoption of a credible deficit reduction plan could lead to a sharp cut in long-term interest rates, as investors reduced their expectations of inflation down the road. But changes that depend on the reaction of government agencies or the alteration of investors' expectations is uncharted territory. And by almost everyone's reckoning, it would be risky business to lock in cuts in spending and increases in taxes before the recession has fully run its course.

Deficit reduction might, of course, be postponed or slowed to match the pace of recovery. But presumably the content of the plan, the priorities implied by the tax increases and spending cuts, would have to be set in concrete from the outset. And here, the Perot outline, drafted by John P. White, an executive at the Xerox Corporation, gets only mixed reviews.

One problem is the distribution of the pain among income classes. The affluent would indeed bear the burden of some of the high-profile changes -- notably, the limit on mortgage deductions and the repeal of the cap on Medicare payroll taxes. But the great bulk -- everything from the gasoline tax to limit on tax-free health insurance to the tobacco tax -- would hit the broad middle class. "It's not very progressive," Mr. Perry, the Brookings economist, conceded.

Another concern is the across-the-board nature of the cuts in discretionary spending. While it might be politic to call for a 10 percent reduction in all programs, the plan begs the critical question of deciding where the fat really is. "You want to think long and hard about cutting meat inspection, I.R.S. audits, customs agents" and dozens of other discretionary programs, Mr. Reischauer said.

But the most serious unanswered -- perhaps unanswerable -- question is whether deficit reduction would compete with other worthy goals. If middle-class Americans are asked to pay more in taxes and receive less in Federal benefits, will they be less apt to underwrite the multibillion-dollar cost of welfare reform? If gasoline taxes go up by 50 cents a gallon, will they tolerate still higher prices at the pump to finance less-polluting fuels?

Perhaps most important, will deficit reduction have to be oversold to be sold at all? While economists are generally eager to get Washington out of the business of spending more than it taxes (at least in good years), bequeathing extra resources to the private sector may not produce a miraculous change in economic growth. "There's an open question about the payoff," Mr. Perry concluded.

Correction:

Articles on Monday and Tuesday about Ross Perot's plan to reduce the Federal deficit referred incor rectly to John White, who oversaw the drafting. He is an executive of the Eastman Kodak Company, not the Xerox Corporation.

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A version of this an analysis; economic analysis appears in print on September 29, 1992, on Page D00001 of the National edition with the headline: Perot's Budget Cuts: How He'd Do It. Order Reprints|Today's Paper|Subscribe